BIR Ruling [DA-261-06]

April 12, 2006 BIR RULING [DA-261-06] RR 17-2003 Department of Social Welfare and Development Batasan Pambansa Complex Constitution Hills, Quezon City Attention: Ms. Luwalhati F. Pablo Secretary and National Project Director Gentlemen : This refers to your letter dated July 14, 2005 requesting that the KALAHATI-CIDSS:KKB (KCKKB) Project be exempted from withholding taxes due from the suppliers/contractors and its subsequent remittance to the BIR. It is represented that on February 11, 2005, a letter was sent to the Office of the BIR Commissioner seeking assistance on the operationalization of the withholding of taxes due from the suppliers/contractors of community approved subprojects and its subsequent remittance to the BIR considering that the project funds as being managed by the community beneficiaries who organize themselves to form a People's Organization which term expires upon completion of their approved subproject or not more than 6-8 months; that it may be emphasized that the KCKKB, as a flagship anti-poverty project of the Government of the Philippines (GOP), covers all barangays of the 25% bottom ranked municipalities of 42 provinces nationwide identified through a poverty mapping activity conducted during the project preparation stage; that the funds, though availed by the GOP through a loan from the World Bank, are directly deposited to the community bank account as a grant to them; that the implementation scheme requires counterpart contributions both from the municipal and barangay LGUs and the communities as well; that these contributions, however, could be in the form of cash or in-kind depending on the capacity and availability of resources of the LGU; that having been implemented in the poorest areas nationwide, most of the contributions being offered by the LGUs as their counterpart to their approved subprojects are in the form of in-kind such as, indigenous materials, bayanihan, use of equipment and other construction materials that could be readily sourced within their locality; that given the situation, the only cash counterpart that the project unconditionally requires from the community beneficiaries with approved subprojects is the cash needed for the opening of the community bank account for subproject implementation in local branches of the Land Bank of the Philippines (LBP), in the amount of P1,000.00; that the predicament of the project now is where to source the taxes that will be remitted to the BIR, should the communities implementing the KCKKB Project be required to withhold such from the suppliers/contractors considering the prohibition on the use of the loan proceeds to pay for government taxes; that the project could easily think of passing on the burden to the communities by urging them to source out funds for the purpose and non-compliance would mean non-approval of their proposed subprojects; that the project would not do so, simply because it is contrary to its ultimate objective which is to alleviate the life of the poor and the vulnerable; that while the Department of Social Welfare and Development (DSWD) is aware of the current fiscal situation of the GOP and realizes that the implementation of the KCKKB Project could be an avenue for fast collection of taxes through the withholding tax system, it could not afford to compromise the life of its beneficiaries by letting them bear such burden; that to ensure that the suppliers/contractors are obliged to pay the taxes due from them, the Project discourages purchase of materials from non-registered suppliers except in the remote areas; and that on this, it may be informed that the project had been able to encourage a number of illegitimate suppliers in the far flung areas to register their business with the BIR. In reply, please be informed that Section 3(N) of Revenue Regulations (RR) No. 17-2003 provides that: "Section 3. Income Payments Subject to Creditable Withholding Tax. Sec. 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: xxx xxx xxx (N) Income payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments, except any casual or single purchase of P10,000 and below, which are made by a government office, national or local, including barangays, or their attached agencies or bodies, and government-owned or controlled corporations, on their purchases of goods and purchases of services from local/resident suppliers Two per cent (2%). DCHIAS A government-owned and controlled corporation shall withhold the tax in its capacity as a government-owned and controlled corporation rather than as a corporation stated in Subjection (M) hereof." On the basis of the aforecited Regulation, casual or single purchase of P10,000.00 and below is exempt from the 2% creditable withholding tax provided that such purchases of goods and services are sourced from the local/resident suppliers. Casual purchases of goods refer to purchases made from non-regular suppliers and oftentimes involve single purchases. However, a single purchase which involves ten thousand pesos (P10,000.00) or more shall be subject to a withholding tax. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer/buyer has transacted at least six (6) transactions, regardless, of amount per transaction either in the previous year or current year. (RR 17-03). However, said purchases must be supported by an invoice/official receipt duly registered with the Bureau of Internal Revenue. Conversely, should the casual or single purchase exceeds P10,000.00, the mandatory creditable withholding tax of 2% and its subsequent remittance to the Government must be duly complied with. The Government agency concerned, the DSWD, must submit to the BIR a list of the purchases made together with the copy of invoices/official receipts to ensure the proper use of the loan proceeds pursuant to Section 4 of RR 8-2002. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service